Whole Foods

Whole Foods

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  UNIVERSITY OF SOUTHALABAMA Whole Foods Market Mohammed Abuzaid 4/7/2016
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  Introduction Whole Foods Marketwas created in 1980 in Austin, Texas. Established as a grocery store for healthy living, and serving people with the highest grade of food available. Less than two years after the company opened, they opened up a second store in Houston. Along the way, Whole Foods spent a great deal of time merging with other companies such as Fresh Fields Markets along the east coast and Well Spring grocery in the Carolinas. In 1992, Whole Foods decided it was time to go public and be traded on the open market. As of 2014, the company has more than 399 stores in three different stores in Canada, United Kingdom, and the United States. The company’s mission is to “promote the vitality and well being of all individuals by supplying the highest quality, most wholesale foods available.” Whole Foods also prides itself with being one of the highest quality food sources there are. According to their filling of the 10-K released in 2014, “We sell the highest quality organic food possible.” The company also likes to buy from local farmers who pass “their” test of using the best water and soil and biodegradable fertilizer. All of their product labels must be verified by an accredited certifying agency. Because of this policy Whole Foods set aside twenty five million dollars to help support locally grown produce. Whole foods growth sales is being driven by healthy eating for long term wellness, environment concerns, and younger generation that values health. A major strength of whole foods is their sales per square foot in cash flows to finance new store developments and not borrow money and accumulate debt.
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  Balance Sheet When viewingWhole Foods balance sheet one of the first things that is noticeable is their cash and cash equivalents account. In 2012 its cash and cash equivalents reached an all time high and has decreased every since. A reason for this decrease could be their ability to use their own cash to finance new stores, and not have to issue new debt to raise the funds. When looking at the book to market value ratio of 2.77 it is significantly less than its book value of 10.80. By the book to market value being low that indicates to investors that the asset value is overstated. By measuring the current assets over the Current liabilities we can see that the company is able to pay off their short term debt 1.23 times. When looking at some competitors such as Kroger and TFM, their average current ratio is only 95%. This could be an indicator that Whole Foods is holding on to more cash than the industry and should either invest more in themselves or pay out a higher percentage as dividends. Even though Kroger has less cash on hand, their stock price is currently 36.08 which is significantly higher than Whole Foods of 29. When looking at the liability ratios it is clear to see that WFM is right on track compared to the industry. Whole Foods inventory turnover is 21 days. Even though we would expect their inventory turnover to be very low it is the same compared to the industry. Yes, inventory levels are increasing each year a big part of that has to do with their expansion on buying new stores.
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  Over the pastfive years inventory has been steadily increasing by 30 million. This could be because the company is expanding and purchasing new stores. The increase in inventory also gives the company an opportunity to maximize sales and increase their market share. This increase could also mean that the company has purchased more goods than it has sold. Looking at the treasury stock it shows that the company went from 153 million shares to 711 million in 2014. Whole Foods believes that the stock price is clearly undervalued and that was the reason for the repurchase. Since the company is growing at a rapid rate they might believe that they will be able to sell the stock at a later date for a profit. Income Statement Whole Foods has 2014 revenue of 14,194 billion dollars, which was an increase from the previous year of 12,917 billion. The revenues has steadily increased from the past four years by about 9% a year. In 2014 it cost the company 9150 billion dollars to generate the revenues. The company also pays no interest. This could be a sign that they are not properly leveraged and could be paying to much in taxes. The company only has a 2% debt leverage witch is really low compared to its competitors of around 23% debt leverage. Statement of Cash Flows Looking at the Statement of Cash Flows one of the first things that stands out is that the company was able to invest 484 million dollars in there selves. This is a strong indication that the company is still in the growing stage of the company life cycle. It is also clear, that accounts receivable has increased in 2014 by 14 million.
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  PEER ANALYSIS With suchsmall amount of publicly traded organic grocery store industries finding a peer for whole foods was not simple. The companies that were chosen to compare to whole foods is Kroger Company (Kr), Super Valu (SVU), and The Fresh Market (TFM). Kroger Company began in 1883 with sales of $108.5 billion in 2014. Our reasoning for choosing Kroger is it’s one of the world’s largest grocery retailer’s and has been used in many analysis to compare to many grocery companies. It is also the oldest of other peers chosen. Super Valu was chosen as a peer because it franchises and independently owns its own stores across the country. They have been leading the pack for more than 140 years. The company is willing to take on new innovations and adapt with new generations. Last, is The Fresh Market it is located in 27 different states with 168 stores. We decided to choose the Fresh Market as a peer because they focus on bringing quality to customers as well as fresh and quality products. There is also one local here in Mobile, Al. According to the NASDAQ, Kroger is the number one peer to Whole Foods, its market value is approximately $51million versus Whole Foods market value of approximately $10million. This could potentially be because Kroger operates 2,623 stores and is more geographically located in 34 states. Whole Foods only has 433 stores in only North America and The United Kingdom. The other two company’s market value Super Valu approximately $5million and The Fresh Market of approximately $1 million are a lot lower. Researching the three company’s ratios gives a more understanding of how these company’s operate.
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  Beta: Whole Foodsbeta risk to the market was relatively the lowest to its peers chosen. Their stocks beta is .80 which is less conservative than the market. Super Value has a beta of 1.12, Kroger .89, and The Fresh Market 1.24. Earnings Per Share: Whole Foods has the second to highest industrial earnings per share of 1.49%. Super Valu has the lowest industrial (EPS) of .74%. With the Fresh Market falling behind with an industrial (EPS) of 1.3%. The highest of all the company’s is Kroger is has an industrial (EPS) of 1.75%. Price to Earnings: All four of the company’s P/E is less than 20 which indicates mature corporations in mature industries. Whole Foods P/E is 18.38%. The Fresh market is 14.27%. Super Valu is 10.19% and Kroger’s is 18.99%. These numbers tend to have investors thinking of lower earnings expectations and hope that future earnings and growth stay at the same level. Based on Investor Peter Lynch ; Guru analysis this was his methodology of future P/E/Growth. Kroger Whole Foods Super Valu The Fresh Market 56% 0% 0% 93% Gross Profit Margin: The Fresh Market leads all of the companies with a high GPM of 32.82%. Whole Foods is next with a 31.13%. For the past years until now, Whole Foods had the highest GPM but this could have changed depending on if the company is using LIFO of FIFO. The other two companies Kroger and Super Valu had the lowest. Debt to Equity Ratio: Whole Foods has a great D/E ratio of all comparable peers. Its D/E is 1.72 it is less than 2. This simplifies that they are not in much debt as others. Kroger’s D/E ratio is currently at 214.19 which is not good at all. The Fresh Market’s
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  D/E was notavailable on Bloomberg. The Fresh Market’s was 0, which can be positive and negative depending on how you look at it. Inventory Turnover Ratio: Whole Foods has the highest amount of days in turnover for their goods, 21.20%. This could be that they sale more non-perishable items than its peers or maybe just its perishable items last longer so they buy more. The Fresh Market has items in turnover for about 18 days. Super Valu inventory turnover is 15.30% and Kroger’ at 15.42%. Dividend: Of our four company’s only Whole Foods and Kroger pays dividends. Whole Foods pays the highest of 34.78% and Kroger 19.99%. Most likely we do not believe that Super Valu nor The Fresh Market will pay dividends anytime soon. 12-Month Operating Profit Margin: The company that uses most of its operating income is Whole Foods. Its 12-month profit margin is 3.48%. The Fresh Market uses about as much as Whole Foods, 3.46%. These two companies control their cost a lot better than Super Valu 1.16% and Kroger 1.78%. This can be because of the sales they have weekly may not be as profitable to the company. Other Important Facts Currently Whole Foods growth is centered on new store openings. It cost Whole Foods between 2.5 million and 3 million dollars to open a new store. Their average size stores are 35,000 square feet with over 91,000 team members. Whole Foods great strategic plan not only comes from new store openings to create growth, but as well as their self-insured programs. Whole Foods insures themselves for things such as liabilities for workers’ compensation, general liability, property insurance, director and officers’ liability insurance, vehicle liability and team
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  member health carebenefits. I feel this is a benefit to the company because if there are any incidents where they need funds to take care of a situation they have a special account for it. They will not have need to take on more debt. The risk to this factor is the company operations could fail because of estimates, could cause potential over or under estimation. Early November of 2015, Whole Foods announced a new 1 billion shares repurchase program. In addition they also released that they have a new capital structure plan and quarterly dividends will be increased from $.13 to $.14 per share. Their capital structure plan is intended to take on additional long-term debt up to $1 billion. The Company may also incur additional short-term debt of up to $350 million, which would be repaid with proceeds from the long-term debt. The Company's intentions are to lower their cost of capital and spend most of the $1 billion buyback in the first half of the fiscal year. Hopefully, future share repurchases are appealing to earnings per share in 2016. A major recent conflict that Whole Foods has faced was a securities class action lawsuit against them. On October 2015, Whole Foods was sued by those who purchased Whole Foods securities between August 9, 2013 and July 30, 2015. “The complaint charges Whole Foods and certain of its officers with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and U.S. Securities and Exchange Commission (“SEC”) Rule 10b-5 promulgated thereunder.” They were accused of falsely misleading statements such as (1) Whole Foods routinely overstated the weight of its pre- packaged products and overcharged customers; and (2) as a result, defendants’ statements regarding Whole Foods’ business, operations, and prospects were false and misleading
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  and/or lacked areasonable basis. This lawsuit affected their stock price which fell about 12%. Valuation Since the company has a 2% debt and 98% equity the WACC is 7.9%. This was derived from the following equation (.006)(.02)+ (.994)(.079)=7.9%. When evaluating Whole Foods we decided to use the free cash flow method. We calculated the growth rate by multiplying ROE by retention ratio (.65)(.1497)=G= 9.7%. Once we obtained the growth rate we looked to see what was the best method to get the required rate of return. The formula that we chose was D1/P0+g= required rate of return. (.52/29.85 + .097= 11.44%. We carried this growth rate constant for the next four years. After year four it was decided to be very conservative and lower the growth rate to 6% thereafter. Whole Foods free cash flows are 881 million dollars. We calculated that our horizon value to be 22662.17 witch was added back to year four. After discounting everything to time zero we calculated the net present value to be 17,778.01 billion dollars. We decided to subtract the total liabilities from our net present value (17,778.01-1931liabilities =15847.01. Since WFM did not have any preferred stock we divided 1584.01/360 ( 360 is the amount of common stock outstanding as of September 2014). It is estimated that the stock price is $44.01 today. Because the current stock price is 29.85, if the stock is purchased today the stock would be undervalued. Since stock prices reflect information, there is a reason why Whole Foods stock is lower than the market. In a recent article from Business Insider says “whole foods is charging way more than their product is worth, The investigators went to several different stores and grabbed 80 random items. The items did not weigh what the packaging said it
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  did. “Inspectors weighedeight packages of chicken tenders, which were priced at $9.99 per pound. Consumers who purchased these packages would have been overcharged by about $4.13 on average, according to a DCA release. One package was overpriced by $4.85.” This article could give investors the wrong impression of Whole Foods and would possible encourage them to sell their stock. References 1.http://finance.yahoo.com/news/whole-foods-market-announces-1-210600244.html 2.http://www.sec.gov/Archives/edgar/data/865436/000086543615000177/wfm10k201 5.htm#s3BA7E8AF541C396B3D9C1D4762C7BD23 3. http://www.wholefoodsmarket.com/